Federal Court Applying Florida Law Finds Insurer’s Duty to Defend Not Triggered by Alleged “Disparagement” in Breach of Confidential Settlement

Lawsuits brought against businesses based on intellectual property issues have become more prevalent. A favorable settlement in such a lawsuit can reduce litigation costs and mitigate the risk of a substantial judgment. However, the settlement can go sideways when a business faces a second lawsuit based on the allegation that a confidential settlement agreement has been breached. A recent case decided by the U.S. District Court, M.D. Florida, Spaulding v. Crum & Forster Specialty Insurance Company demonstrates the care required when filing a lawsuit following violation of the terms of such a settlement agreement.

In Spaulding, plaintiffs (the insured) sued Meth Lab Cleanup, LLC (Meth Lab) for trademark and intellectual property infringement. Meth Lab alleged that Spaulding inappropriately utilized its competitor’s service marks. The parties to this dispute resolved the matter and entered into a confidential settlement agreement. Subsequently, Meth Lab initiated another lawsuit against the insured alleging a cause of action for breach of the confidential settlement agreement. The alleged breach was based on “disparaging” actions designed to harm Meth Lab. The insured contended that the insurer’s duty to defend was triggered under the commercial general liability policy, which provides coverage for “personal and advertising injury” arising out of an “offense” committed during the policy periods. The policy also provided defense of suits seeking damages related to personal and advertising injury. The trial court granted summary judgement for the insurance company, and the policyholders appealed.

The appellate court first observed that “the general rule is that an insurance company’s duty to defend an insured is determined solely form the allegations in the complaint against the insured, not by the actual facts or the cause of action against the insured, the insured’s version of the facts, or the insured’s defenses.” Put another way, the insurance carrier must defend if the factsalleged in the complaint bring the injury within the scope of policy coverage. The insurer is required to defend in this situation regardless of the merit of the alleged facts. However, the court cautioned that “conclusory buzz words” that were not based on alleged facts were insufficient to trigger the duty to defend.

The insured argued that the allegation of facts relating to “personal and advertising injury” caused by an “offense” arising out of the insured’s business triggered policy coverage and gave rise to the commercial liability carrier’s duty to defend. The policy defines the term “offense” as an “oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.”

The Confidential Settlement Agreement was alleged violated based on “urging” another company to initiate cancellation proceedings against Meth Lab’s trademark registration and “assisting” another company through the filing of a counterclaim in an unrelated lawsuit. The court concluded that the insured essentially was equating its allegations using conclusory terms like “urging,” and “assisting” but provided no actual facts involving disparaging conduct. The court noted the lack of allegations about statements (oral or written) made to “urge” or “assist” the other company nor allegations that such statements were false. The court ruled in favor of the insurance company and found the carrier had no duty to defend because the complaint was silent regarding the content of any disparaging information.

A particularly interesting aspect of this case is that the court rejected the insured’s claim that the complaint was artfully crafted to avoid triggering the commercial policyholder’s duty to defend. Although the insured cited cases from another state that had looked beyond the complaint to the actual conduct of the parties to find coverage in this situation, the court indicated that Florida law mandated that the court not look beyond facts alleged within the four corners of the complaint.

This decision provides a glaring example of the importance of careful pleading of the facts when filing a complaint against an insurance company. In this case, the insured’s attempt to use conclusions rather than alleging facts with sufficient specificity resulted in the denial of coverage being upheld by the court. Insurance companies have a team of experts, adjusters, and attorneys who develop legal arguments and draft their paperwork, so a layperson without the benefit of an experienced Florida insurance claims attorney faces a difficult uphill battle without legal representation.

You can reach Attorney J.P. Gonzalez-Sirgo by dialing his direct number at (786) 272-5841, calling the main office at (305) 461-1095, or Toll Free at 1 (866) 71-CLAIM or email J.P. directly at [email protected].

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